The hold-up problem derives from ideas in game theory. It tells the story of a worthwhile investment that did not come to pass because its beneficiary could not commit to not exploiting the investor once an investment was made. To theorists, it underlines the importance of commitment and contractual enforcement. It has been invoked in legal sentencing, competition policy and anti-trust decisions. It has been attributed to a lack of firm innovation and human capital investment. It shapes bargaining over household fertility (here) and is (wrongly) used to defend noncompete employment contracts (here).
This blog is not about the hold-up problem per se but economic theory writ large. I use the hold-up problem as a metaphor as it conveys a broad epistemological point in an era that is ever more fixated on big data: we cannot count in a counterfactual world. To imagine the alternative is to do theory. Whether an investor does not invest for lack of a viable proposition or in anticipation of others reaping the fruits of their labour is indistinguishable in the data. To tell the two apart, we must make assumptions and formulate a theoretical model that can then be probed further empirically.
In this blog, I discuss recently published papers in economic theory (just published), and re-visit classical insights (rear view) that help us make sense of the world we live in. I report insights from conferences (circus), propose simple observations and game-theoretic puzzles (jottings) and, if I cannot avoid it, comment on contemporary issues (current affairs). Comments and debate are highly encouraged.
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